HP, IBM's Next Target: Security Guru Fortinet

SUNNYVALE, Calif. ( TheStreet) -- Earlier this year, Fortinet ( FTNT) was a relatively little-known security company, quietly duking it with security software's biggest names. Fast forward a few months, and Fortinet is suddenly being touted as a potential acquisition target for Hewlett-Packard ( HPQ), IBM ( IBM), Dell ( DELL) and Oracle ( ORCL).

So, what is Fortinet, and why is the company such hot property?

One of the first firms to offer an all-in-one approach to network security, Fortinet, which competes with Cisco ( CSCO), Check Point Systems ( CHKP) and McAfee ( MFE), touts its FortiGate appliance as a sort of Swiss Army knife for network security: it combines firewall, antivirus, VPN and intrusion prevention systems.

"We like that Fortinet helps to simplify an overly complex network security landscape," said Jayson Noland, an analyst at R.W. Baird, in an email to TheStreet. "Fortinet's concept of a Universal Threat management (UTM) appliance was well ahead of its time -- Fortinet also offers performance advantages given the company's silicon expertise."

Fortinet's processors have been fine-tuned to quickly detect complex cyber-threats without impacting network performance. As online threats become ever more sophisticated with the advent of smarter smartphone software and other, less-secure mobile devices, cybersecurity has become much higher profile, spelling good news for Fortinet.

Mirroring the company's solid stock performance over much of this year, Fortinet is also enjoying robust sales: Its recent second-quarter revenue was up 24% compared to the same period last year, driven by strong demand from both enterprises and service providers. In total, more than 500,000 FortiGates have been shipped to over 75,000 customers worldwide since Fortinet launched its first product in 2002.

Earlier this month, Fortinet also announced that the FortiGate appliances are approved for use by all Department of Defense agencies; the devices' FortiOS operating system recently achieved a coveted computer security standard used by the government, which bodes well for the company's expanding sector of federal jobs.

One of TheStreet's Breakout Stocks, Fortinet, which went public last year, lists NTT ( NTT), Nissan, Chungwa Telecom, and the UAE Central Bank among its customers, and derives nearly 60% of its revenue from its high-margin subscription business.

The recent flurry of security M&A, like HP's $1.5 billion acquisition of ArcSight ( ARST) and Intel's ( INTC)$7.7 billion McAfee deal, has also boosted Fortinet, pushing the company's shares up more than 36% in the last month.

Rival Cisco, in contrast, saw its stock dip just over 2% over the same period, which Check Point's shares rose a little over 2%.

Fortinet's stock dipped 2 cents, or 0.08%, to close at $24.98 on Monday. TheStreet's Jim Cramer, however, urged investors to wait for a pullback before buying into the company during Monday's Mad Money show. Recent acquisition chatter has driven Fortinet's stock upward, he said.

Wall Street analysts have also noted Fortinet's recent upsurge.

"Like a few of the best-in-class technology firms we cover, I'm sure some of the recent stock price performance is based on take-out speculation," R.W. Baird analyst Noland told TheStreet. "We could see them being acquired by a firm looking to expand its networking portfolio."

Investors should also consider the possibility that Fortinet might not get bought, which could drive down its stock price, as well as ongoing fierce competitive challenges. Cisco, for example, remains the 800-pound gorilla in the networking space, while Intel is likely to lavish resources on its McAfee acquisition.

Fortinet refused to discuss the possibility of M&A when contacted by TheStreet, but there has still been plenty of speculation about potential suitors.

Erik Suppiger, senior research analyst at Signal Hill Capital, recently told TheStreet that Fortinet would make a logical acquisition for HP, thanks largely to its firewall technology. "Fortinet could also be interesting to IBM ( IBM), Dell ( DELL) or even Oracle ( ORCL)," he added.

Ken Xie, Fortinet's founder and CEO, nonetheless boasts a solid tech startup track record: He founded firewall trailblazer NetScreen in 1997, which was acquired by Juniper ( JNPR) for $4 billion in 2004. Xie subsequently guided Fortinet through its IPO last year, raising $156.3 million during an extremely tough market for public offerings.

With the company now in its quiet period ahead of third-quarter earnings, Xie declined to provide comment for this story.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

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